Zhen from the CIIS pointed out there are signs that the U.S. subprime mortgage crisis is fading. In mid-July, with troubled home loan giants Fannie Mae and Freddie Mac holding a combined $5 trillion in debt, the U.S. Government announced massive federal loans in order to salvage the two companies and the country's real estate industry. "If the U.S. Government left the current situation alone, it might trigger a new subprime mortgage crisis," Zhen said.

The crisis has been marked by four high tides since last year, Zhen said. In spring 2007, as the housing bubble burst and homeowners defaulted on subprime loans, U.S. lenders began to declare bankruptcy. The U.S. Government poured funds into the banking system, while the Federal Reserve responded by lowering the interest rate. In January 2008, the Federal Reserve calmed global financial markets with another dramatic interest rate reduction, three quarters of a percentage point. In mid-March, when investment bank Bear Stearns appeared on the verge of bankruptcy, the U.S. Government arranged its purchase by JPMorgan Chase. The last one came in mid-July, with the rescue package for Fannie Mae and Freddie Mac. But it's not over yet.

"The crisis could last for one or two more years. The U.S. dollar continues to depreciate, therefore international inflation pressure will increase," Zhen said, adding China must take measures to cope with the coming danger.

China's inflation pressure and treatment

As an important player in the global economy and one of the biggest developing countries in the world, China is highly vulnerable to worldwide inflation. "China is facing the highest inflation pressure in recent decades," Zhen said.

By the end of 2007, China's CPI had increased 4.8 percent. At one point in April, the country's CPI increase hit a zenith of 8.5 percent. Unlike many countries whose CPI and producer price index (PPI) have both seen substantial increases, inflation in China has mainly affected consumer prices. Food and energy prices have been among the hardest hit.

In recent years, China's food prices have stayed relatively low, making farmers reluctant to undertake agricultural production. Since 2007, due to the double effects of an increase in international food prices and domestic shortages of grain, cooking oil and pork, China's CPI has started to skyrocket. The increase in food prices accounts for about 84 percent of the total CPI increase, said Chen from CICIR.

In addition, this year China has had to use much more foreign currency to buy fuel on the world market. In 2007, China imported oil products valued at $96 billion. Due to higher oil prices and demand, however, China's oil imports in the first five months of 2008 cost $67 billion, 60 percent of total spending in 2007.

The rising cost of mineral resources is especially dangerous, Chen said, because it affects not only the CPI but also the PPI. China and Australia recently signed an iron ore purchase contract, under which China will pay up to 96 percent more than last year. Moreover, 10 years of low inflation and high economic growth have boosted labor costs. "The markup brings troubles to all related aspects and enterprises," Chen said. "Their costs increase, but their profit space is shrinking." For example, in east China's coastal cities, many small and medium-sized enterprises that sell the majority of their products to foreign countries are having a hard time. Some have had to lay off employees, while others have shut down completely.

Compared to other countries, China's inflation is still low and is in a "controllable range," said Chen, while Zhen from CIIS believes China's economic growth will remain stable. They pointed out that China, being a large agricultural country, would not be influenced too much by the increase in international grain prices. The two experts said that China's economic growth this year could be 10 percent, but they also warned that if current inflation worsens, it would slow down the country's economic development.